ICICI Prudential Life Insurance Company Limited (NSE:ICICIPRULI) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Most readers would already be aware that ICICI Prudential Life Insurance's (NSE:ICICIPRULI) stock increased significantly by 9.2% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on ICICI Prudential Life Insurance's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for ICICI Prudential Life Insurance is:

9.9% = ₹12b ÷ ₹119b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.10 in profit.

View our latest analysis for ICICI Prudential Life Insurance

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

ICICI Prudential Life Insurance's Earnings Growth And 9.9% ROE

On the face of it, ICICI Prudential Life Insurance's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.1%. However, ICICI Prudential Life Insurance has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that ICICI Prudential Life Insurance's reported growth was lower than the industry growth of 37% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if ICICI Prudential Life Insurance is trading on a high P/E or a low P/E, relative to its industry.

Is ICICI Prudential Life Insurance Using Its Retained Earnings Effectively?

ICICI Prudential Life Insurance has a low three-year median payout ratio of 9.9% (or a retention ratio of 90%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, ICICI Prudential Life Insurance has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 14% over the next three years. Still, forecasts suggest that ICICI Prudential Life Insurance's future ROE will rise to 14% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we have mixed feelings about ICICI Prudential Life Insurance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.